Subject to certain conditions set out in the AIFM- and UCITS-Directives, as transposed into domestic law, German fund management companies may outsource tasks to service providers. Such outsourcing is particularly relevant for the popular business model of the so-called “Master-KVG”-structure in Germany: Fully compliant with the prohibition of a letter box, the German fund management company offers risk management and administrative services under such structure, whereas portfolio management for the investment funds may be delegated to German and non-German asset managers (for further details, please refer to our earlier description).
One of the conditions to be fulfilled for the outsourcing of the portfolio management or risk management to a third country service provider is that the cooperation between the German regulator (BaFin) and the competent authorities of the respective third country must be assured (Sec. 36 (1) Sentence 1 No. 4 of the German Capital Investment Code – KAGB).
Based on this requirement, BaFin has previously stated in letters to the fund management companies it supervises that the outsourcing to UK entities may become unlawful in a hard Brexit scenario – thus causing considerable uncertainty for the German management companies and the UK asset managers.
However, the Federal Ministry of Finance (BMF) has now confirmed that both ESMA and the national regulator BaFin are committed to negotiate a memorandum of understanding (MoU) regarding the future cooperation with the Financial Conduct Authority (FCA) following Brexit. The BMF has indicated that fund management companies may already base their further plans on the assumption that such MoU with the FCA will be concluded.
Thus, the communication by the BMF is good news for the German and UK fund industry. However, it should also be mentioned that the statement is not official guidance and is not legally binding. Since Brexit is a moving target, the situation should be closely monitored.